Final exam material:

Test: Section 1: Wednesday, 8:00 – 10:30

Section 2: Wednesday, 3:00 – 5:30

Powerpoint slides:

Module 7: remnants for the final (last two slides)

Modules 8 through 10: Appraisal and Investment Analysis

Module 11: "Leases"

Also, the handouts and homework on real estate investment and appraisal.

From the text:

Module 8: Chapter 22 (only the parts on leases).

Modules 9 through 11: Chapters 7, 8, 17, 18, 19, 20.

Also, any pages referenced in powerpoint slides

Articles:

Real Estate Personalities and Arizona Bottling Plant

Test Format:

Multiple Choice / True False; 50 questions; about 40 percent of the points are on quantitative problems; see test philosophy handout for further information

Chapter 7

  • Accrued depreciation:In cost appraisal, the identification and measurement of reductions in the current market value of a property from today’s reproduction cost
  • Adjustments: Additions or subtractions from a comparable sale price or cost which are required to make the comparable property more directly comparable to the subject property
  • Appraisal: An unbiased written estimate of the fair market value of a property
  • Appraisal report: The document the appraiser submits to the client and contains the appraiser’s final estimate of market value, the data upon which the estimate is based, and the calculations used to arrive at the estimate
  • Arm’s-length transaction: A transaction between two parties that have no relationship with each other and who are negotiating on behalf of their own bet interests. A fairly negotiated transaction and reasonable representative of market value.
  • Comparable properties: Properties similar to the subject property used in the sales comparison approach to calculate a single indicated value for the subject property
  • Elements of comparison: The relevant characteristics used to compare and adjust the sale prices of the comparable properties in the sales comparison approach
  • External obsolescence: Losses of property value caused by forces or conditions beyond the borders of the property. The losses are deducted from a building’s reproduction cost in the cost approach to estimating market value.
  • Functional obsolescence:Losses in value of a building relative to its reproduction cost because the building is not consistent with modern standards or with current tastes of the market
  • Highest and best use: The use of a property found to be (1) legally permissible, (2) physically possible, (3) financially feasible, and (4) maximally productive
  • Indicated value: The final value of estimate for the subject property resulting from application of one of the major approaches in the appraisal process
  • Investment value: Asset, as defined in the U.S. Internal Revenue Code, owned primarily for earning an investment return – especially capital appreciation – as opposed to an asset that is held for use in the one’s trade or business. Raw land and developed lots are real estate examples of investment properties.
  • Market conditions:The relationship between supply and demand for a particular type of real estate in a local market at a specified point in time
  • Market value: The price a property should sell for in a competitive market when there has been a normal offering time, no coercion, arm’s-length bargaining, typical financing, and informed buyers and sellers.
  • Nonrealty items: Items of personal property.
  • Physical deterioration: Loss of value of a building from its reproduction cost, resulting from wear and tear over time
  • Property adjustments:Five sale price adjustments made to comparable property made to comparable property transactions prices: location, physical characteristics, economic characteristics, use, and nonrealty items
  • Reconciliation: The process of forming a single point estimate from two or more numbers. It is used widely in the appraisal process. For example, in the sales comparison approach to develop a single indicated value from several final adjusted sale prices of comparables, and in final reconciliation to develop a final estimate of value from two or more indicated values.
  • Repeat-sale analysis: Estimation of the rate of property appreciation through statistical examination of properties that have sold twice during the sample period. Normally, the analysis is by statistical regression.
  • Replacement cost: The cost to build a new building of equal utility to an existing building that is not an exact physical replica of the existing building.
  • Restricted appraisal report: Provides a minimal discussion of the appraisal with large numbers of references to internal file documentation. If the client just wants to know what the property is worth and does not intend to provide the appraisal to anyone for use or reference, a restricted report may be sufficient.
  • Self-contained appraisal report: Includes all the detail and information that were relevant to deriving market value or the other conclusions within the report. Most self-contained appraisal reports use the “narrative” reporting option. The narrative appraisal report is the longest and most formal format for reporting and explaining appraisal conclusions and contains a step-by-step description of the facts and methods used to determine value. Self-contained narrative reports are typical in appraisals of major income-producing properties.
  • Subject property: The property for which an appraisal of fair market value is produced.
  • Summary appraisal report: This report summarizes the conclusions of the appraisal. The majority of the data and techniques used in the appraisal are kept in the appraiser’s work file. Most summary appraisal reports use the “form” reporting option. Forms reports are much shorter than narrative reports, and their frequent standardization creates efficiency and convenience. Form reports are generally required by mortgage lenders when house-holds are purchasing or refinancing a single-family home.
  • Transactional adjustments: In an appraisal, adjustments to comparable property transaction prices that concern the nature and terms of the deal.
  • Transaction price: The prices observed on sold properties.
  • Uniform Standards of Professional Appraisal Practice (USPAP): Rules governing the appraisal process and reporting of appraisals that are developed by the Appraisal Standards Board of the Appraisal Foundation. Appraisers are obligated by law to follow these rules and guidelines.

Chapter 8

  • Capital expenditures (CAPX):Expenditures for replacements and alterations to a building (or improvement) that materially prolong its life and increase its value.
  • Contract rent:The rent specified in the lease contract.
  • Direct capitalization:The process of estimating the value of a property by dividing a property’s annual net operating income by an overall capitalization rate.
  • Direct market extraction: Method of estimating the appropriate capitalization rate from comparable property sales.
  • Effective gross income (EGI): The total annual income the rental property produces after subtracting vacancy losses and adding miscellaneous income
  • Effective gross income multiplier (EGIM): The ratio of the sale prices to the annual effective gross income of the income-producing property
  • Fee simple estate: The complete ownership of a property; may be either absolute or conditional
  • Going-in cap rate (R0):The overall capitalization rate; the ratio of the first-year net operating income to the overall value (or purchase price) of the property
  • Going-out cap rate (R1): The ratio of the estimated net operating income in the year following sale to the overall value of the property at the time of sale
  • Income capitalization: The process of converting periodic income into a value estimate
  • Internal rate of return (IRR):The rate of interest (discount) that equates the present value of the cash inflows to the present value of the cash outflows; that is, the rate of discount that makes the net present value equal to zero.
  • Leased fee estate:The bundle of rights possessed by the landlord in a leased property, made up primarily of the right to receive rental payments during the lease term and ultimately to repossess the property at the end of the lease term.
  • Market rent: The rent that could be obtained by renting a property on the open market.
  • Natural vacancy rate: The proportion of potential gross income not collected when the use (rental) market is in equilibrium.
  • Net operating income (NOI): The type of income to a property used in direct capitalization, calculated by deducting from potential gross income vacancy and collection losses and adding other income to obtain effective gross income. From this amount all operating expenses are subtracted, including management expense and a reserve for replacements, or capital expenditures, and other nonrecurring expenses.
  • Net sales proceed (NSP): The expected selling price less selling expenses
  • Operating expenses (OE): The expenses that are necessary to operate and maintain an income producing property
  • Overall capitalization rate (R0): The type of capitalization rate used in direct capitalization, calculated by dividing comparable properties’ net operating incomes by their selling prices.
  • Potential gross income (PGI): The total annual income the property would produce if it were fully rented and had no collection losses.
  • Pro forma: A cash flow forecast prepared to facilitate discounted cash flow analysis.
  • Reconstructed operating statement: A statement of property income and expenses formatted for the purposes of appraisal and investment analysis. Differs from typical management operating statement in treatment of certain expenses, including management fees, mortgage payments, and vacancy and collection losses
  • Reversion: The cash proceeds from sale
  • Selling expenses (SE): Costs associated with the disposition of a property
  • Terminal capitalization rate (Rt): Rate used to convert annual net cash at the end of an expected holding period into an estimate of future sale price
  • Terminal value (Vt): The sale price at the end of the expected holding period

Chapter 17

  • C corporation: Corporate ownership structure that provides limited liability, but suffers from double taxation and does not enable losses to flow through to investors for current use.
  • Commingled real estate funds: A collection of investment capital form various pension funds that are pooled by an investment advisor/fund manager to purchase commercial real estate properties
  • Equity REITs: Real estate investment trusts that invest in and operate income-producing properties
  • Full platform operating company:
  • Funds from operations (FFO): Net (accounting) income, plus tax depreciation, plus amortization of leasing commissions and tenant improvements. Is considered a better measure of a REIT’s cash flow than accounting income.
  • General partnership: An ownership form characterized by multiple owners, unlimited liability for each equity holder, and flow-through taxation of both taxable income and cash distributions
  • Intermediaries: In real estate investment, third party specialists who use their expertise and knowledge to invest and manage funds on behalf of clients.
  • Limited liability company (LLC): A hybrid form of ownership that combines the corporate characteristics of limited liability with the tax characteristics of a partnership.
  • Limited partnership:A partnership in which one party (the general partner) assumes unlimited liability in exchange for control of all material in decision making. The limited partners enjoy liability that is limited to the extent of their equity contributions to the entity. All parties involved benefit from flow-through income and taxation; that is, the partnership is not taxed
  • Mortgage REITs: Real estate investment trusts that purchase mortgage obligations and effectively become real estate lenders.
  • Net asset value (NAV): Equal to total market value of a REIT’s underlying assets, less mortgages and other debt.
  • Pension funds: Retirement savings accounts that now represent a major source of equity capital in commercial real estate markets
  • Real estate investment trusts (REITs): A corporation or trust that uses the pooled capital of many investors to purchase and manage income property (equity REIT) and/or mortgage loans (mortgage REIT)
  • Real estate private equity funds:
  • Securitized investments: Investment instruments that pool investment assets, enabling investors to purchase a share in the pool of assets.
  • Separate accounts: An investment manager acting on behalf of multiple clients holds each client’s assets in a separate account rather than as part of a commingled fund to permit customized investments for each client
  • Subchapter S corporation: Corporate ownership structure that is a federal tax election made with the unanimous consent of the shareholders. An S corporation possesses the same limited liability benefits for its shareholders as do C corporations but it is not a separate taxable entity.
  • Syndicate: A group of persons or legal entities who come together to carry out a particular investment activity.
  • Umbrella partnership REIT (UPREIT): An organizational structure in which a publicly traded REIT owns a fractional interest in an operating partnership, which in turn, owns all or part of individual property partnerships.

Chapter 18

  • After-tax cash flow (ATCF): The residual claim on the property’s cash flow after the mortgage lender(s) and the state and federal government have collected their share.
  • Equity dividend rate (EDR): The “capitalization rate” for equity. It is derived by dividing the before-tax cash flow by the value of the invested equity capital. Sometimes referred to as the property’s dividend rate/yield, also the “cash-on-cash return”
  • Net income multiplier (NIM): A cash flow multiplier calculated as the acquisition price divided by the net operating income
  • Operating expense ration (OER): A measure of annual operating costs, defined as operating expenses divided by effective gross income.
  • Pro rata share: An amount proportionate to the ownership interest of an investor

Chapter 19

  • After-tax equity reversion (ATER): The before-tax equity reversion, defined as net selling price minus the remaining mortgage balance, at the time of sale less taxes due on sale.
  • Before-tax cash flows: Annual net operating income less annual debt service
  • Leverage: The use of mortgage debt to help finance a capital investment
  • Levered cash flow: The property’s net rental income after subtracting any payments due the lender.
  • Unlevered cash flow: The expected stream of NOIs and the expected net sale proceeds (NSP). This represents the income-producing ability of the property before subtracting the portion of the cash flows that must be paid to the lender to service or retire the debt.

Chapter 20

  • Active income:In U.S. income tax law, taxable income earned from salaries, wages, commissions, fees, and bonuses
  • Adjusted basis (AB): Equal to the original cost basis, plus additional real property or personal property capital expenditures, minus the cumulative amount of tax deprecation taken since the property was placed in service.
  • Capital gain tax rate: Rate of tax applied to the portion of the taxable gain on sale that is due to appreciation in the market value of the property
  • Cost segregation: An income tax strategy separating personal property from real property. Owners often do this because personal property can be depreciated at accelerated rates if it can be separated from the real property and other personal property.
  • Dealer property: Under U.S. income tax law, real estate held for sale for others.
  • Deferral benefits: The gain to the taxpayer from delaying the payment of income taxes until the property is sold. This benefit is produced by the annual depreciation deduction.
  • Depreciable basis: Generally, the value of the acquired property, also called the original cost basis, less the value of the land
  • Depreciation: Annual deduction that allows investors to reduce the amount of taxable income they report by an amount that is intended to reflect the wear and tear on the property over time.
  • Depreciation recapture: The cumulative amount of depreciation that has been taken since the property was placed into service. This amount is generally taxed at the depreciation recapture tax rate when/if the property is sold.
  • Depreciation recapture rate: The tax rate that is applied to the depreciation recapture portion of the gain on sale when/if the property is sold.
  • Effective tax rate:The percentage amount by which income taxes reduce the going-in IRR on a property acquisition or development
  • Excess deductions: The amount by which allowable tax deductions (including depreciation) exceed the rental income generated by the property.
  • Internal Revenue Service (IRS): Created by Congress to collect federal income taxes and to clarify and interpret tax rules and regulations
  • Investment property: Asset, as defined in the U.S. Internal Revenue Code, owned primarily for earning an investment return – especially capital appreciation – as opposed to an asset that is held for use in one’s trade or business. Raw land and developed lots are real estate examples of investment properties.
  • Like-kind exchanges: A popular method of deferring capital gain taxes which allows owners, under certain circumstances, to exchange their properties for another and avoid paying capital gain taxes at the time of the transaction.
  • Low-income housing: Housing targeted to households with low or moderate incomes.
  • Midmonth conversion: Tax rule that assumes the acquisition of an income producing property occurs on the 15th day of the month, regardless of the actual acquisition date.
  • Ordinary tax rate: The rate of tax applied to taxable income that is not deemed to be capital gain income or depreciation recapture income.
  • Original cost basis: The total costs paid to acquire the property including land, building, personal property, and other acquisition costs such as lawyer fees, brokerage commissions, and so on.
  • Passive activity income:IRS classification of income that includes all income generated from trade and business activities such as rental real estate
  • Passive activity loss restrictions: IRS rules that, in general, allow losses from passive activities, which includes all rental properties, to be used only to offset income from other passive investment
  • Personal property: Objects that are movable and not permanently affixed to the land or structure, including furniture and tenant fixtures that are often purchased in conjunction with real property acquisitions.
  • Personal residence: An owner-occupied housing unit.
  • Portfolio income: An IRS classification of income generated from securities such as stocks and bonds. Income directly obtained from rental real estate activities is not considered portfolio income.
  • Section 1231 property: Trade or business property held for more than one year, as classified in Section 1231 of The Internal Revenue Code
  • Trade or business property: Under Section 1231 of the Internal Revenue Code, real estate held for more than one year in a trade or business activity, including most income-producing property.
  • Up-front financing costs: Cost incurred by the property owner to obtain mortgage financing, including loan origination fees, discount points, appraisal fees, and survey. On a rental property investment, these cost are amortized over the life of the loan for tax purposes.

Chapter 22: